Of the many disruptive technologies at the grid edge, efficiency may sound like a simple construct, but it's one of the most complicated to unleash.

At the system level, the concept of efficiency is emerging as the holy grail of the new energy future, both for end users and in market constructs. In theory, an electricity system that incentivizes efficiency should allow for distributed energy resources such as solar, storage and electric vehicles, while still valuing the larger grid.

Realizing that vision, however, is an immense challenge that only a few state regulators are taking on boldly. Some are overhauling utility regulation as large amounts of renewable energy come on-line; others are driven by the increasing frequency of severe weather events and growing peak demand. At the recent National Town Meeting on Demand Response and Smart Grid, a panel of state regulators (with Ralph Izzo, president and CEO of Public Service Enterprise Group Incorporated, thrown in for good measure), discussed the issues they’re facing.

“We’re redefining...basic utility service,” said Audrey Zibelman, commissioner of New York's Public Service Commission, referencing the REV proposal that seeks to rethink the role of distribution utilities in the state in the face of climate change, an aging grid and a vast distribution system.

New York is not alone. Also out front is Hawaii, which has the highest renewable portfolio standard targets in the U.S., and where renewables are already price-competitive, given the state's longstanding reliance on costly diesel. “We’re writing the rest of the country, and the world, a postcard from the future,” said Lorraine Akiba, commissioner of the Hawaii Public Utilities Commission. “We’re looking to give guidance to utilities on how to transform to a new distributed resource market.”

Actually, it’s more of a tome than a postcard. The issue is not just integrating rooftop solar, or how much and what type of storage should be installed. It is a fundamental question of changing the entire value proposition of grid assets and the increasing assets -- especially controls -- at the grid edge.

In New York, the Public Service Commission would like the distribution utilities to be the platform providers that manage all of these distributed assets, and there are also mechanisms for utilities to earn more money for technological innovation. “If you moved to managing this at the edge of the system, then it’s a much more effective system,” said Zibelman.

Hawaii and New York will attempt to move faster through the proceedings than they traditionally have in the past, even though the scale of the proceedings is far larger than anything else undertaken in recent years.

How much does ratemaking need to change?

After about a century of having an electric system that is sized for the highest-demand days of the year, industry participants and stakeholders have finally started to question the efficiency of an oversized power grid. Peak demand costs New York state about $450 million per year, according to Zibelman.

But moving away from a regulatory construct that has encouraged and supported that model is proving extremely difficult. There is an open question of whether the process should start with efficiency on the transmission and distribution system, or with energy efficiency and demand response. The most creative regulators are beginning to acknowledge that the problem isn't an either/or dichotomy.

Some utilities are skeptical of what the outcome will be. Izzo, whose company operates the distribution grid on Long Island, New York (formerly the territory of LIPA), questioned whether the regulators can bring efficiency -- both system-wide and demand-side -- front and center.

“Have we really put our shoulder to the wheel on energy efficiency? We have not,” he said. “We have to get away from the utility rate base stopping at the meter.” On another panel, Steve Malnight, VP of customer energy solutions at Pacific Gas & Electric, noted that the changes in domains like net metering rules to address disruptors such as distributed solar are inadequate. “I think we’re pretty far away from that in aligning prices for the value of the grid,” he said, “but if it’s done right, rates can go up, but what consumers pay will go down.” This is because customers will have the option to engage with the electric system and use power in a more efficient manner.

The regulators don’t necessarily disagree, but how they get to ratemaking beyond the meter -- and what that even means -- is a question that is now being debated. “The business-as-usual approach...just can’t cut it anymore,” added Zibelman. “The fact of the matter is that the meter isn’t the boundary.” In New York, the idea is that new rates would allow distribution utilities to own assets behind the meter, and rates would reflect the value those assets provide to the grid.

One of the challenges is that the market changes will require standardized controls to manage distributed energy resources. The technology exists, but has not been dispatched on the scale and real-time basis needed for what New York envisions. “You have to salute New York for putting out some provocative stuff,” said Steve Corneli, SVP of policy, strategy and sustainability for NRG Energy, a company that hopes to capitalize on the emerging markets for energy services.

Are customers (and politicians) ready?

Some argue that sophisticated technology isn’t necessary to make significant inroads in terms of system efficiency, especially on the demand side. Izzo called for a real focus on efficiency first, but also questioned whether the average consumer cares enough to jump into the new energy market.

“Energy is not top-of-mind for consumers,” asserted Izzo. The efficiency initiatives he would like to see involve weatherization and caulking, not necessarily sophisticated sensors. “Customers might be using less electricity, but they depend on it more,” he said. “But they don’t realize that until it’s gone.”

No one understands that it’s a hard sell better than Izzo, who spent the last year trying to get approval for PSE&G’s Energy Strong proposal in New Jersey, only to get the go-ahead for less than half the original proposal's price tag. Even after Superstorm Sandy ravaged New Jersey, regulators and consumer advocates were skeptical about handing a big pile of cash to the utility to upgrade the system.

But the entire point of the proceedings in New York and Hawaii is that investments that increase the efficiency of the system should not be pigeonholed into an outdated ratemaking construct. This entails rethinking the value of fuel mix, resiliency and customer assets and then incentivizing utilities to maximize the resources at their disposal.

Customers who choose to engage with the grid -- whether that means residential users allowing the utility to fine-tune the thermostat on hot summer days or corporations putting their energy storage systems into the frequency-regulation market -- should see a benefit. “In the past, what we lacked in the industry is the pull. We’d been pushing customers,” said Zibelman. “But now they will see their bill can go down because of engagement.”

The argument that bills will go down is a precarious one, however. In most cases, electricity bills likely will just not increase as much as they might have without regulatory changes. “I don’t think we should be misrepresenting to customers what will happen,” said Ann Berwick, chair of Massachusetts' Department of Public Utilities. “I think we’ll save them money compared to what has been [the case]. We shouldn’t say we’ll be saving them tons of money.”

If New York and Hawaii get it right, the significant changes to the market will create an ecosystem that customers will want to engage with, similar to how telecom deregulation led to the development of goods and services that users pay far more for than they did for landline service, because they value the new services more.

Beyond the front-runners

When it comes to regulatory innovation, states like California, New York and Hawaii are often far ahead of many places in the Southeast or Midwest. But Hawaii’s Akiba says her state’s work in integrating distributed resources and valuing efficiency will translate to the nation's heartland. “It doesn’t matter that we’re an island,” she said. “If anything, we’re a better living laboratory. We can’t sell that excess energy across state lines.”

But Hawaii, New York, Texas and California have an advantage in that each of their electricity markets are aligned with a single public utility commission, compared to states that operate in larger regional markets such as PJM Interconnection. Paul De Martini, managing director at Newport Consulting Group, said that the move to step back and think big about the role of the utility in the future will also happen in other states. “We’re going to see a lot more of that,” he said, citing the work the Electric Power Research Institute is doing around IntelliGrid.

Other states will likely not be as bold, even if New York and Hawaii succeed, but they could take significant steps. Massachusetts, often lauded for its energy efficiency efforts, could still go much further -- and its regulators know it. “We haven’t really tapped the opportunity” to bring efficiency to the demand side, said Massachusetts DPU chair Berwick.

The incremental approach favored by most regulators could mean that real reform winds up mired in bureaucratic limbo for years to come, if it's addressed at all. In the regulatory cycle, five years is a flash in the pan, while for technology, it is multiple lifetimes. The regulators will also have to look forward, rather than backward as they usually do, as they set the parameters of what a new system will require in terms of technology.

“You need to do tradeoff between economic optimization and reliability,” said De Martini. “You can’t drive down the road at 60 mph looking in the rearview mirror.”